Multiple Choice

Trading, at its most basic level, is a game of probabilities.

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Trouble with you is the trouble with me, Got two good eyes but you still don't see. Come round the bend, you know it's the end, The fireman screams and the engine just gleams...

(Grateful Dead)

Good morning and welcome back to the panic attack. There's no time to waste in the race towards Q4 as traders prepare for a battle hardcore. "That sound that you hear is time tickin' by," said Hoofy the bull with a gleam in his eye, "and despite the slight fright from the bears on the fly, they can't knock me down with their feeble supply!" Will the bovine all dine on the coming decline and re-live the smiles of late '99? Or will Boo now be fine that he's drawing a line and daring the bulls to enter his shrine? It's tricky--it's Tuesday--it's time for a thrill so please settle in for a romp through the 'Ville!

As traders cast an eye towards their pending paychecks, DEFCON levels in the marketplace are sure to uptick. You can't blame 'em for feeling the heat as 2004 has been a grind any way you slice it. The steadfast bulls--who feasted on roast bear last year after their post-bubble smoke--have gotten clocked in a handful of former faves. The once proud ursine--walking gingerly after singing Moon River in '03--can't seem to deliver the knock-out punch. The net result is frustration and compression, an environment where nobody is happy and everyone has a beef.

The way I see it, one of three scenarios will likely unfold in the coming months. I firmly believe that the script is still being written and, as such, it's difficult to pin down a path with absolute certainty. Still, I hope that "seeing" the alternatives will provide value as we find our way through the minxy fray.

A)Stuffage! This recent move is on its last legs as we edge towards September expiration. While the next few sessions are cloudy (option traders can do that), the combination of dual resistance (S&P trendline/NDX 200-day), fundamental wake-up calls (pre-announcements), geopolitical unease (Iraq, Russia, North Korea) and rate concerns (reality bites) will be too much for the bulls to, er, bear. Further, it seems that lotsa funds are "lettin' it ride" with hopes of making up for lost time (and profits). With the VXO at eight year lows and the VXN at all-time lows, you can almost see the pin pushin' towards the hedgie bubble. "Off the top of the head odds": 50%

B)Rampage! Corporate spreads are drum tight, the trannies are at 52-week highs, the Russell broke out above its 200-day and lotsa tech charts have shaped up. There has been no selling pressure all year and there is a motivated agenda to get the tape higher both into and out of the election. As long as Elmer keeps the liquidity spigot open, the ursine will spin their wheels as the bulls make 'em squeal. If it's possible to have a wall of worry with vols this low, we're seeing it now. "Off the top of the head odds": 25%

C)Muck, muck and more muck! The truest definition of a bear market is an environment where nobody makes money. That's been the theme all year and it's quite possible that the scenarios above offset one another. In lieu of absolute movement, rolling rotations through the sub-sectors will provide subtle opportunities for the keen observer. As for the overall tape, however, there will be alotta frustration and membership in the Hair Club for Traders will hit an all-time high. "Off the top of the head odds": 25%

Human nature dictates that we respond to inputs from our environment. As such, a slew of bulls have now emerged to proclaim that it's time to run and gun. What's worse, they're taunting those who aren't on board the Matador express! While it could happen (see above), I will remind you that we heard a similar chorus from the bears in the middle of August.

My subtle suggestion is for you to do your own work and make decisions that are consistent with your unique time horizon and risk profile. Opportunities are made up easier than losses and the next few months will require us to be tip top, shnitz hot and second to none (sir) in our efforts. Take a deep breath, relax your grip on the handlebars and think positive--it's all starts within.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

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